Preliminary Findings: Task Clarity and Credibility in Relational Contracts

We develop and test a relational contracting model where building relationships requires the principal and agent to solve task clarity and credibility problems. We model task clarity as the likelihood of the agent finding a productive action for the principal and demonstrate that it influences the agents propensity to fulfill promises the usual notion of credibility in relational contracts. This is because improving task clarity increases the ease of replacing a relationship after a defection, making defection more tempting. We validate our model using a decade of administrative data from the Ethiopian floriculture industry. Our estimation documents that: i) task clarity problems are economically relevant in the industry and larger for domestic firms, ii) consistent with a unique prediction of our model, domestic firms, due to their lower task clarity and despite a lower discount factor, are less likely to defect on relationships as a response to improvements in the outside option, and iii) the buyer and seller components of task clarity explain differences between foreign and domestic firms in credibility and overall success in relational contracts.